Trade Secret

Quick Summary of Trade Secret

In most US states, a formula, pattern, physical device, idea, process, compilation of information or other information that 1) provides a business with a competitive advantage, and 2) is treated in a way that can reasonably be expected to prevent the public or competitors from learning about it, absent improper acquisition or theft.

A trade secret is information that is not known to the public, that its owner takes steps to keep from public knowledge and that has value because it is not known to the public. The owners of trade secrets can protect them using non-disclosure agreements, non-competition agreements, and state trade and federal trade secrets statutes.

The best-known example is the Coca-Cola formula, a unique recipe that has been successfully protected for over a century. But other information can include key customer lists, techniques used to make or market a product, etc.

As employees move from one employer to another, few secrets remain secret for long. Where new technology is involved a patent is the safer choice in that the law specifically protects the invention. However, others point out that the life of a patent is only 17 to 20 years and throughout that period, your invention is published and available to the public and to competitors. A properly protected trade secret can be kept proprietary for decades or centuries.

Where a secret formula is involved, the most common technique to protect the formula is to prepare a series of concentrates, usually at different locations, and then supply them to downstream users with code names. Hence, Coca-Cola bottlers received Coca-Cola syrup, and the makers of Coca-Cola syrup probably receive one or more concentrates that are combined to make the syrup. This way, few employees need to know what ingredients go into the finished product. They know only their part of the formula.

Still, if the secret leaks out, it can be difficult to protect in court. The burden of proof is on the owner of the trade secret. How does he know that his formula is being used unless he has access to the production facilities where it is made? If it was reverse-engineered or developed independently, is that a violation?

Trade Secrets Defined

The Uniform Trade Secrets Act, as adopted by Ohio, defines a trade secret as:

information, including the whole or any portion or phase of any scientific or technical information, design, process, procedure, formula, pattern, compilation, program, device, method, technique, or improvement, or any business information or plans, financial information, or listing of names, addresses, or telephone numbers, that satisfies both of the following:

1. It derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use.
2. It is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

In a non-disclosure agreement (“NDA”), the parties are free to define the information that they intend to protect. Hence, the parties can define trade secrets broadly to cover additional information. In practice, however, NDAs tend to track the language of the Uniform Trade Secrets’ Act definitions.

The most common forms of trade secrets in employment litigation are customer lists and pricing information. Marketing plans, software, engineering drawings and other non-public information stored in electronic form under password protection will also likely qualify as trade secrets.

Misappropriation

The Trade Secrets Act describes a violation in terms of “misappropriation.” A misappropriation means any of the following:

• Acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means;
• Disclosure or use of a trade secret of another without the express or implied consent of the other person by a person who did any of the following:

1. Used improper means to acquire knowledge of the trade secret;
2. At the time of disclosure or use, knew or had reason to know that:
   1.  the knowledge of the trade secret that the person acquired was derived from or through a person who had utilized improper means to acquire it,
   2. was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use,
   3. or was derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use;
3. Before a material change of their position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.

An employee who makes a copy of the employer’s password-protected customer list and sends a direct mail advertisement to each customer on the list for his or her new employer has misappropriated trade secrets.  By definition, an employee who has access to an employer’s trade secret information acquires it under circumstances giving rise to a duty to maintain its secrecy.  The information only obtains its trade secret status if the employer takes reasonable steps to keep it secret. Importantly, the new employer has also misappropriated the trade secrets, since the customer list used for its benefit was derived from a person (the employee) who had a duty to maintain its secrecy.

Inevitable Disclosure Doctrine

Some states have adopted the inevitable disclosure doctrine that allows an employer to enjoin an employee from accepting competitive employment, even in the absence of a non-competition agreement.  Specifically, the inevitable disclosure doctrine states that an employee who is performing essentially the same work for a new employer, which work requires the knowledge and use of proprietary information, will find it difficult or impossible, not to use or disclose his former employer’s confidential information.  In other words, trade secrets law has been applied to employees who have not actually committed a trade secret violation, if a court finds that it is inevitable that they will do so due to the nature of their job.

Unwritten Trade Secrets

Some states have found that a customer list or other secret information contained only in the employee’s head is, nonetheless, a protectible trade secret. In those states, the employee does not have a defense that he or she actually took nothing. Rather, the court treats the memorized information the same as written information.

Injunctive Relief And Money Damages

The trade secret owner can bring a civil action under the Trade Secret’s Act for an injunction, which is a court order directing the employee and new employer to stop using the trade secret information. If the parties violate the order, they are subject to civil contempt sanctions.  Parties to non-disclosure agreements may also agree to an injunction in the event of a breach of the agreement.

In addition to an injunction, a trade secrets owner can seek money damages for the misappropriation. Ohio’s Uniform Trade Secret Act permits money damages that include both the actual loss caused by misappropriation and the unjust enrichment caused by misappropriation that is not taken into account in computing actual loss. In lieu of damages measured by any other methods, the damages caused by misappropriation may be measured by imposition of liability for a reasonable royalty that is equitable under the circumstances considering the loss to the complainant, the benefit to the misappropriator, or both, for a misappropriator’s unauthorized disclosure or use of a trade secret.

In addition, if willful and malicious misappropriation exists, the court may award punitive or exemplary damages in an amount not exceeding three times the monetary award, as well as reasonable attorneys’ fees. Conversely, if a party brings a trade secrets act claim in bad faith, the responding party can recover his or her attorneys’ fees as well.

Unlike the Trade Secrets Act remedies, the non-breaching party to an NDA cannot recover treble damages or attorneys’ fees. The non-breaching party can only recover lost profits and obtain an injunction against further breaches.

Trade Secrets And Non-Competition Agreements

Trade Secrets Protection and NDAs restrict a person’s use of confidential information. Non-competition agreements, however, prevent a person from engaging in a particular activity for a certain time and in a certain area. Thus, a non-competition agreement can have significantly more adverse effects on an employee.

Non-competition agreements exist to protect legitimate employer interests. A widely recognized employer interest is the protection of employer trade secrets. Hence, courts tend to enforce non-competition agreements whose purpose is aimed at preventing an employee from, for example, engaging in a competing business through the use of the employer’s trade secrets.

Federal Trade Secret Protection

The federal Economic Espionage Act makes the theft or misappropriation of trade secrets a crime. Covered misappropriation includes theft of trade secrets for the benefit of foreign powers and the theft of trade secrets for commercial or economic purposes regardless of who benefits.  The Economic Espionage Act of 1996 applies outside of the United States where the offender is a U.S. citizen or any act occurred in the United States involving the misappropriation of the trade secret.

Trade Secret FAQ's

Cite Term

Definition Sources